Cost-benefit analysis

Every society is facing a number of risks and their regulation requires many considerations. From an economic standpoint, it can be said that risks impose a cost on society. Avoiding and regulating risks equally engenders costs. In order to help public decision makers come to terms with these trade-offs, economists have developed the method of cost-benefit analysis. It is based on the simple idea that things are worth doing when the benefits from doing them are greater than their costs. As simple as this basic idea is, as tricky and controversial are the implications of putting it into practice. Issues of controversy relate to valuing environmental benefits, determining the value of human health and life, balancing the interest of current and future generations by discounting, and dealing with the biases of subjective risk perception when defining a rational risk policy. This chapter will introduce the basic assumptions underlying cost-benefit analysis and the procedures involved in conducting one.